0. The Context for MPC - Department of Computer and Information

2. Demand Management
2.1. Demand Management in the MPC
 Demand Management is the key connection
to the market in the front end of the MPC
system. As such, we gather information from
and about the market by engaging in
forecasting customer demand, entering
orders, and determining specific product
requirements.
 It is through this module that quantities and
timing for all sources of demands must be
developed and coordinated with the
planning (via SOP) and control (via MPS)
activities of the company.
2.2. Demand Management & MPC Environments
 Classifying MPC environment in terms of
“customer order decoupling point.”
 Customer order decoupling point is the
point at which the firm, not the customer,
becomes responsible for determining the
timing and quantity of materials to be
purchased, made, and finished. That is, the
point at which demands changes from
independent to dependent.
2.2. Demand Management & MPC Environments
A. Make-to-Stock (MTS) Demand Management
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The key focus in this environment is on the
maintenance of finished goods inventories.
Considering the tradeoffs between inventory level
and customer service level; defying the tradeoffs by
being lean and flexible?
Forecasts are needed for individual item level by
location (e.g., plant warehouses, distribution center,
local warehouses, and VMI) and time period.
Concerns of increased forecast error at the item
level? Use ratio/mix or % of aggregated forecasts
as product mix is relative constant over time.
2.2. Demand Management & MPC Environments
B. Assemble-to-Order (ATO) Demand Management
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ATO is made possible through built-in modularity in
engineering design .
The key task in this environment is to define
customer orders in terms of available options, and to
keep customer due date promise.
Advantages of moving from MTS to ATO: improved
product flexibility, forecast, and reduced inventory
carrying costs (e.g., Dell PC; xn vs. nx).
Component inventory affects customer service.
2.2. Demand Management & MPC Environments
C. Make-to-Order (MTO) Demand Management
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The primary task in this environment is to get
product specifications from the customers and
translate these into manufacturing terms in the
company (e.g., QFD).
Two key factors are design (specification) and lead
time (components) since they can affect the
resource availability (e.g., components and
engineering) of other products.
Adjusting capacity after orders are released to the
shop floor.
2.3. Communication with Others
Demand Management <=> SOP
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Demand management needs to provide SOP with all sources of
demand forecast information (spare parts, promotion, inventory
buildups or backlog, etc.) both in timing and quantity (e.g.,
green Volvo).
Demand Management <=> MPS
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The underlying concept is that forecasts are consumed over
time by actual customer demands/orders, in terms of planned
materials and capacities. Thus, as customer orders are received
and entered into the MPS, the detailed order information must
be provided to the master production scheduler. Likewise, the
status of orders, capacity consumed (and available) must be
provided to demand management to keep customers informed.
MPS example.
Demand Management <=> Customers
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Order booking/service/entry: communication from the customer
(order and change requests) and to the customer (delivery date
and order status).
A process of consuming the forecast with actual orders.
2.4. Information Use in Demand Management
• EDI (electronic data interchanges, since 1970s)
– A technology that enables the transmission of routine
business documents having a standard format from
computer-to-computer, phone or dedicated lines. The
software is complex (X12 Form has 150 fields) and
expensive using batch processing (orders, invoices,
payments, etc.)
• E-Commerce (Internet-based systems)
– flexible (Java applets) for any communication (ftp,
http, email, etc), low cost, near real-time, reaches
wider community of users.
2.4. Information Use in Demand Management
Supply Chain Management (SCM) represents one of the most
significant paradigm shifts of modern business management by
recognizing that individual businesses no longer compete as
solely autonomous entities, but rather as supply chains.
Make-to-Knowledge (replacing forecasts with knowledge)
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The notion that allows supply chain members (between a pair
of supplier and customer) to operate with knowledge of the
other firm’s needs/operations to enhance the competitiveness
of the entire chain, not just that of each of the companies
independently. Fig. 2.6
2.4. Information Use in Demand Management
Data Capture and Monitoring
 For SOP: capturing the overall market trends and
patterns for the product families.
 For MPS: monitoring the detailed product mix.
CRM (customer relationship management) technologies link
front office (e.g., sales, marketing, and customer
service) and back office (e.g., operations, logistics, and
human resources) functions with the company’s
customer “touch points” including the Internet, email,
sales, call centers, stores, etc.
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Data from CRM, reflecting more closely actual customer
demand, can be used to develop make-to-knowledge plan.
Reading: “Understanding CRM…” by Chen and Popovich in BPMJ
2.5. Managing Demand
Demand Management is the gateway between the firm
and marketplace, where:
market intelligence is gathered
forecasts of demand are developed
status of customer orders is maintained
Demand Management responsibility is fulfilled by various
functional departments.
For example, when an order is received,
credit check ↔
order entry ↔
materials/parts ↔
delivery ↔ logistics dept.
2.5. Managing Demand
credit check ↔ finance/accounting dept.
order entry ↔ sales (customer service) dept.
materials/parts ↔ purchasing (supply management) dept.
delivery ↔ logistics dept.
The coordination can be done by sales and marketing or
supply chain management dept. or
materials management dept.
 Responsibility of coordination must be well defined !
 Authority for order changes (see figure)
2.5. Managing Demand
Service level setting: service level = 1- stock-out risk
Inventory investment increases exponentially as
service level is increased!
Demand Filter Monitoring: checking demand
against a range of reasonable values (e.g., 4 MADs).
When an “unusual” demand is found, it could be
treated separately so that it won’t influence the
average (forecast). e.g., 10, 9, 11, 32, 12, 14, 13
Demand Management capability (see DELL’s DNA)
2.5’. Dell’s Supply Chain DNA
Dell’s Four Core Capabilities
SCM Capabilities
Demand Management
Processes
Direct model (A-T-O)
People
Maniacal about
execution/ Bias for
action
Business fundamentals Balance sheet/ P&L
Rewarded for
decreasing costs
2.6. CPFR
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Collaborative Forecasting, Planning, and
Replenishment (CFPR)
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Recall uncertainty and the Bullwhip effects.
CFPR is a supply chain initiative designed to improve
competitiveness by focusing on communication and
information sharing among supply chain trading
partners in planning, forecasting, and inventory
2.6. CPFR
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Collaborative Forecasting, Planning, and
Replenishment (CFPR)
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Goal: reducing variance between supply and demand
Eliminates typical order processing.
Forecasts can be frozen and then converted into a
shipping plan.
Developed by the Voluntary Interindustry Commerce
Standards Association (VICS)
2.6. CPFR
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Background:
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Wal-Mart has long been known for its careful analysis
of cash register receipts and for working with
suppliers to reduce inventories. In the past, like most
other retailers, Wal-Mart did not share its forecasts
with its suppliers.
Retailers ordered more than they needed in order to
avoid product shortages and lost sales, and suppliers
produced more than they could sell.
2.6. CPFR
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Background:
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Benchmarking Partners, Inc. was funded by Wal-Mart,
IBM, SAP, and Manugistics to develop a software
package called CFAR (pronounced “see far”), which
stands for collaborative forecasting and replenishment.
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Wal-Mart initiated CFAR with Warner-Lambert’s Listerine
product.
2.6. CPFR
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Background:
The parties went through as many cycles as needed to
converge on an acceptable forecast.
 Wal-Mart benefits: 1. in-stock position from 85% to 98%,
2. increases in sales and
reduction in inventory costs.
 Warner-Lambert benefits: 1. smoother production plan,
2. lower average costs.
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2.6. CPFR: Other Results
• Nabisco and Wegmans
 50% increase in category sales
• Wal-Mart and Sara Lee
 14% reduction in store-level inventory
 32% increase in sales
• Kimberly-Clark and Kmart
 Increased category sales that exceeded market
growth
2.6. CPFR: Other Results
• Sears and Michelin
 25% combined inventory reduction
• Campbell Soup
 reduced the inventories of retailers from 4 to 2
weeks’ supply = savings of 1% of retail sales.
9-Step CPFR (Fig. 2.7)
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2
3
4
5
• Establish collaborative relationship – may
require culture change & process redesign
• Create joint business plan
• Create sales forecast
• Identify exceptions to the sales forecast
• Resolve/collaborate on exception items
9-Step CPFR (Fig. 2.7)
6
7
8
9
• Create order forecast
• Identify exceptions to order forecast
• Resolve/collaborate on exception
items
• Generate order
2.6. CPFR
• Culture change from traditional transactional
relationships between buyers and suppliers to
collaborative relationships.
• CPFR is grounded on the paradigm of strategic
management theory that emphasizes the development
of collaborative advantage, as opposed to competitive
advantage. Within the collaborative paradigm, the
business world is composed of a network of
interdependent relationships developed and fostered
with the goal of deriving greater and mutual benefits
(JOM, Chen and Paulraj 2004).
Buyer-Supplier Relations
 Competitive (arm’s length) Orientation:
Zero-sum game between supplier and buyer
When a buyer has more clout?
• Big share of suppliers’ sales
Buyer-Supplier Relations
 Cooperative/Collaborative Orientation:
 Seller and buyers are partners
 Becomes popular with dramatic JIT success
Supplier as a Partner
Aspect
Competitive
Cooperative
Number of suppliers
Many
One or a few
Length of
relationship
May be brief
Long-term
Low price
Major consideration
Moderately important
Reliability
May not be high
High
Openness
Low
High
Quality
May be unreliable;
buyer inspects
At the source;
vendor certified
Volume of business
May be low
High
Flexibility
Relatively low
Relatively high
Location
Widely dispersed
Nearness is
important
2.6. CPFR Adoption
• Despite promising pilots, CPFR’s adoption rate
has been slower than expected.
 companies may still have legacy information
systems that delay implementation.
Information sharing requires that partners
trust that they are working in each other’s
best interests.
 A good Research paper topic. (current state,
success factors, implementation barriers, etc.)